Write down the problems in constructing the index numbers.

Following are the main problems in the construction of index numbers.

1. The purpose of the Index:Before going to construct an index number, it is very essential to define the purpose and nature of its line.

There is no all-purpose index. Every index is of limited and particular use. For example, the cost of living for workers in an industrial town will have different requirements compared with the one for agriculture workers.

2. Base year:Another problem in the construction of Index Numbers is the choice of a proper base year. The base year should be a normal one. It should be free from abnormalities like wars, earthquakes, famines, booms etc. Moreover it should not be too distant in the past.

3. Selection of items:The items should be selected in such a manner that they are representative of the taste, habits and customs of the people for whom the index is meant

4. Price Quotations:The next problem is to obtain price quotations for the commodities selected. We know that prices of many commodities vary from place to place and even from shop to shop in the same market. A decision must also be made as to whether the wholesale price or retail price are required. The choice would depend upon the purposes of Index.

5. Choice of average:Next comes the choice of average. Mostly choice is to be made between arithmetic mean and geometric mean. Though geometric mean is the best in theory yet arithmetic mean is more popularly used while constructing Index Numbers.

6. Selection of appropriate weight:All the items included for construction of Index Numbers are not of equal importance. So they should be given weightage according to their importance.